Goldman On The Greek Elections

Yesterday, Greek Prime Minister Papademos visited President Papoulias to announce the dissolution of the current parliament. General elections have been called for the May 6. Elections in Greece are held in a one-round national ballot. In a brief note on the actions and implications of the Greek election, Goldman notes that the Greek political scene is undergoing a significant transformation. The traditional split between center-left (PASOK) and center-right (New Democracy, or ND)) is no longer the key dilemma for Greek voters. According to a number of recent polls, there is a significant margin of undecided voters. In addition, a number of small and new parties are projected to enter the new parliament. This has created market concerns that the Greek elections could lead to an anti-Euro government, which could interrupt the adjustment efforts underway and create risks to local financial stability.

Goldman Sachs: General Elections Called in Greece

Yesterday, Greek Prime Minister Papademos visited President Papoulias to announce the dissolution of the current parliament. General elections have been called for the May 6.

Elections in Greece are held in a one-round national ballot. The parties that manage to gather more than 3% of the votes are allowed to occupy seats in parliament. After the ballot, the President will call the leader of the party with the most parliament seats to form a government that is supported by at least 151 votes (from a total of 300) in the new parliament in a vote of confidence.

The electoral system in Greece supports the formation of stable majorities, in principle. First off, there is a 50-seat bonus to the leading party (again out of 300), which makes it easier for the leading party to gather enough support to form a stable government (in a coalition perhaps). In addition, should a large number of parties emerge that gather significant percentages in the ballot but fail to cross the threshold for entering the parliament, then the first party will gather even more parliament seats for the same amount of votes.

Pro-austerity Coalition Government is the Most Likely Outcome

As we wrote in a recent daily (Greece Post PSI, March 9, 2012), the Greek political scene is undergoing a significant transformation. The traditional split between centre-left (PASOK) and centre-right (New Democracy, or ND)) is no longer the key dilemma for Greek voters. The unconditional support that PASOK and ND have exhibited towards the coalition government under PM Papademos has created a fresh split between the parties willing to carry the political cost of austerity in order for Greece to stay in the Euro and those that are either ambiguously positioned on the subject or outright anti-Europe.

According to several opinion polls, public discomfort with the mishaps of the governments the two major parties have formed over the last decade has led to a significant decline in their popularity and poll performance. Whereas in the past PASOK and ND jointly polled at about 70-80%, their joint polling rates have declined to about 30-40%. According to a number of recent polls, there is a significant margin of undecided voters. In addition, a number of small and new parties are projected to enter the new parliament.

This has created market concerns that the Greek elections could lead to an anti-Euro government, which could interrupt the adjustment efforts underway and create risks to local financial stability. We think this is unlikely for the following reasons:

Given the electoral law described above, even under current polling rates, the two leading parties (PASOK and ND) would likely gather enough parliamentary votes (>151) to form a majority government jointly.

The opposition parties are plentiful but fragmented. There are stark ideological differences among the parties of the left – and much more so between those of the far left and the far right. The agendas and the pursuits are very different, as are the positions on EMU participation. The probability that the opposition parties form a stable and coherent coalition of their own is fairly low, in our view.

Polling companies continue to warn that the high percentage of undecided voters creates a wide margin of error around current polls. Given the high public support for the EUR (typically north of 60% in past surveys), the current polls probably understate the actual ballot results for PASOK and ND (the parties most clearly pro-EUR).

What Follows the Election Will Be More Important to Watch

What follows the elections will be key to watch for Greece. The significant economic challenges ahead will require that the next government enacts and applies legislation targeted mainly towards: 1) spending cuts; and 2) structural reforms such as deregulation of product and labor markets. These are also the priorities of the new EU/IMF adjustment program for the three years ahead.

The success of any coalition formation and the long-term political stability of Greece will heavily depend on the capacity of the Greek government to efficiently apply these budgetary and structural reforms going forward. Thus, even if a pro-Euro coalition emerges, the support of participant parties towards the reform process will need to be resolute. Immediately following the elections, we identify three signals as to whether the new government enjoys such a support:

If indeed a pro-Euro coalition government emerges, the government will need to be backed by a comfortable majority. For Greek parliament’s standards, this typically means a parliamentary majority north of 160 seats.

The members of the new government would need to be experienced individuals, with strong technical background, reform-oriented mindset, and broader credibility.

The new government’s program goals (laid out at the confidence vote) should be specific and not create areas of conflict with the currently voted adjustment program.